The Big Four accounting firms Deloitte, EY, KPMG and PwC have found themselves at the centre of a disagreement between US and Chinese regulators over each other's auditing practices. Through local joint ventures the Big Four regularly audit Chinese-based companies listed on the American stock exchange. However, this could all come to an end if the US Securities and Exchange Commission (SEC) has its way.
On Wednesday 22 January, an SEC administrative trial judge ruled that the Chinese arms of the Big Four should be suspended from auditing US-listed companies for six months. In a 112-page ruling, the SEC judge said that the Chinese units of the Big Four had violated the Sarbanes-Oxley Act by "wilfully" failing to hand over audit papers of a number of Chinese companies under investigation for accounting fraud.
At the same time, China's state law says that company accounts can be claimed as state secrets, preventing audit firms from disclosing any information about the Chinese clients' accounts for fear of breaking the law.
This has left the Big Four effectively playing piggy in the middle with US regulators and the Chinese government. "They're putting pressure on us because they think we can influence the regulators in China, which is absolutely not correct," said Paul Winkelmann, the partner in charge of risk and compliance for PwC in Greater China.
The Big Four said they intend to appeal against the ruling. Yet, there is strong recognition from the international community that China needs to clean up its act if it wants to do business across the globe. "Allowing large corporations to keep secret their accounts allows bubbles, corruption, cronyism and fraud to more readily occur," says Lu-Hai Liang, a journalist in Beijing. "China in general needs to be more transparent about its business dealings. The western world's level of transparency can be improved too. However, for China to progress a greater level of transparency, including for company accounts, would be a good thing for its business environment over the long term."
One hell of a pickle
The suspension, which has yet to come into effect, could have serious consequences for companies in both China and the US. According to experts, Chinese accounting firms don't have the resources available to audit these large companies. "If the Big Four can't sign these audits, all these companies are in a hell of a pickle," said Paul Gillis, an accounting professor at Peking University.
Essentially, China-based, US-listed companies would be unable to file accounts and could see their shares suspended from US stock exchanges. Multinationals, who are listed in the US, and have significant operations in China, could also face the same fate if they use local Chinese firms to audit their operations in the country.
On neutral ground
The impasse is indicative of the strained relations between the two world superpowers and could potentially damage US-China economic links, which is why it has been a hot topic at the recent World Economic Forum in Davos, Switzerland. Although it seems a suitably neutral ground on which Chinese and US officials can talk through their differences, a simple heart-to-heart is unlikely to see Beijing open its books.